Financial Advice Line

Don't let your credit score strike you out

By Thomas A. Fogarty, USA TODAY

For years, the credit industry treated consumers' credit scores like a fraternity's secret handshake.

Hushed by contract agreements, credit bureaus would supply your lender, but not you, the three-digit score summarizing your creditworthiness. Lenders were allowed to reveal scores to applicants only when denying credit.

But much has changed in the past year. Firms once responsible for keeping credit scores secret now eagerly market them to consumers at prices ranging from $9 to $80.

Even if you're appalled at the notion of buying back your own credit information, the expense may be justified. Here's why:

Your credit score is a key factor in determining your access to credit, and the interest rate you'll be charged.
The list of uses for credit scores is growing. Auto- and homeowners-insurance companies are looking at credit scores to gauge the likelihood of customers' future claims, and setting premiums accordingly. More employers are screening job applicants by credit score. Some landlords consult them before renting.
Identity theft can be devastating emotionally and financially. Checking your credit score, as well as your credit files, could be your earliest indication of a problem.

How it works

Think of your credit score as a baseball pitcher's earned run average.

Instead of measuring how many runs you're responsible for per nine innings pitched, a credit score distills your credit history to predict the likelihood you'll repay on time. A bad ERA can send a pitcher into retirement. A bad credit score means more expensive borrowing costs or denial of credit altogether.

The wider availability of credit scores is due largely to a 2001 California law requiring mortgage lenders and credit bureaus to make the information available to consumers. Mortgage lenders must provide scores for free to borrowers for real estate in California.

But credit bureaus, which are permitted to charge a reasonable fee under the California law, must make the information available to any Californian who asks. In complying with California law, credit bureaus have decided to make scores available to consumers nationwide.

Chris Larsen, CEO at Internet lender E-Loan and a longtime advocate of openness in credit scoring, says the California legislation is significant because it's the first law establishing the right of consumers to get their credit scores.

But the state law is too limited, he says. Most home buyers in the USA still don't have a legal right to get a score from their mortgage lenders. And although scores are now available for purchase, the costs to consumers are too high, Larsen says.

"We're probably a quarter of the way there," Larsen adds. "We definitely need a federal law."

The federal Fair Credit Reporting Act limits credit bureaus to a $9 charge for providing you your full credit file. By bundling credit scores with the file, credit firms are able to bump the price up by $5 or so. For yearlong access to credit reports and scores, companies are charging up to $80.

Credit scoring was invented in the 1950s at Fair Isaac, a California research firm that continues to own the mathematical model for what's called the FICO score. It remains the credit industry standard, but many reputable scoring models replicate the FICO. Both the FICO and the FICO imitators rate credit on a scale ranging from about 350 to about 850. The midpoint dividing the top half of credit risks from the bottom half is about 720.

Here's what consumers can do now:

Monitor credit files, scores

The Internet abounds with opportunities to check your scores and credit files. You actually have a multitude of credit scores because competing formulas may be applied to the different credit data held by the three national credit bureaus — Equifax, Experian and TransUnion. Ideally, your various credit scores should fall within a narrow range, but that doesn't always happen.

Most of the score providers offer a range of services — from a one-time check of a single score based on a single credit file to a year's subscription that allows you to monitor all changes in your credit data.

Some of the Internet offers and their range of fees:

MyFICO. This is co-sponsored by Fair Isaac and Equifax, so your Equifax credit file is the basis of this credit score. $13-$39.
Scorecard. Score is based on Experian data. $13-$80.
ConsumerInfo.com. Its cheapest option provides credit files from the three national bureaus but a credit score based on Equifax data only. Additional scores based on other bureaus cost $5 each. $35-$80.
TransUnion. TransUnion has resisted the kind of consumer marketing of its competitors. The firm sells credit reports under the limitations of the Fair Credit Reporting Act and state laws and tacks on a credit score at no extra charge. That means you won't pay more than $9.
Nor does TransUnion sell a yearly subscription. Instead, the firm advises consumers to check their credit files once a year — which is not bad advice.
E-Loan. For free, this Internet lender offers consumers a credit score based on information on file with Trans-Union. No credit report included.

Correct mistakes

Federal law sets procedures for correcting inaccurate information in a credit report. One of the benefits of reviewing your report online is the ability to challenge bad information instantly by clicking a box on the Web site.

After a challenge, the credit bureau has 30 days to check with the creditor who supplied the information. If the creditor agrees, the credit bureau makes the fix. You can also pursue the issue with the creditor. If the disagreement festers, you have the right to add to your credit file a statement explaining the dispute.

The Federal Trade Commission, at www.ftc.gov or (877) 382-4357, can advise you about your rights in a credit dispute.

A growing practice in the mortgage business is something called "rapid rescoring," a process by which the lender's agent deals directly with the credit bureaus to correct or update bad credit information that is holding down a credit score.

Quicken Loan CEO Bill Emerson says his firm has been using rapid rescoring for about a year. It expedites the mortgage deal by reducing to a week or less a process that would ordinarily take a month or two.

Emerson says rapid rescoring is used in about 10% of the firm's applications. It's added as many as 80 points to a customer's score, he says. The charge to the applicant, if any, depends on how much information has to be changed, Emerson says, and it's the applicant's decision whether to undertake the effort.

Boost your score

If you've been letting your bills slide, your credit score will be lousy until you start paying them.

But that's not the same as saying faithful payment of your bills guarantees a high score. That's because timely bill payment is one of many ingredients in the mathematical stew of credit scoring. Others include the number and types of open credit lines, your loan balances and the age of your credit lines.

It's not always apparent that a specific action — closing an account, for example — will have a measurable effect on your score. Nonetheless, consumers can draw some inferences about how to boost scores. When you buy your score, you'll get a series of "reason codes" citing the main causes your score isn't higher. If, for example, one reason is your credit lines haven't been open long enough, all you can do is wait. If, however, the reason is that too many of your credit lines carry a balance, consolidating or closing some of them may boost your score.

Critics, such as E-Loan's Larsen, say credit firms shouldn't leave consumers guessing about how they can improve a score.

Partly in response to such arguments, Experian's Scorecard Web site permits you to play a "what if" game, showing the effect of certain actions on your credit score. Fair Isaac spokesman Craig Watts says MyFICO will add a similar feature.